Why the Debt Deal Failed

Almost immediately after the so-called grand bargain between President Obama and the Republican speaker of the house, John Boehner, unraveled last July, the two sides quickly settled into dueling, self-serving narratives of what transpired behind closed doors. In the months that followed, some of Washington’s most connected Democrats and Republicans told me in casual conversations that they didn’t know whose story to believe, or even what, exactly, had been on the table during the negotiations. A few mentioned, independently of one another, that the entire affair reminded them of “Rashomon,” the classic Kurosawa film in which four characters filter the same murder plot through their different perspectives. Over time, the whole debacle became the perfect metaphor for a city in which the two parties seem more and more to occupy not just opposing places on the political spectrum, but distinct realities altogether.

There is a practical reason for this. Both sides knew that if the most crucial and contested details of their deliberations became public, it would complicate relationships with some of their most important constituencies in Washington — or worse. It’s one thing for a Democratic president to embrace painful cuts in Medicare and Social Security benefits, or for a Republican speaker to contemplate raising taxes, if they can ultimately claim that they’ve joined together to make the hard decisions necessary for the country; it’s quite another thing to shatter the trust of your most ideological allies and come away with nothing to show for it. Obama and Boehner have clung to their separate realities not just because it’s useful to blame each other for the political dysfunction in Washington, but because neither wants to talk about just how far he was willing to go.

The Republican version of reality goes, briefly, like this: Boehner and Obama shook hands on a far-reaching deal to rewrite the tax code, roll back the cost of entitlements and slash deficits. But then Obama, reacting to pressure from Democrats in Congress, panicked at the last minute and suddenly demanded that Republicans accede to hundreds of billions of dollars in additional tax revenue. A frustrated Boehner no longer believed he could trust the president’s word, and he walked away. Obama moved the goal posts, is the Republican mantra.

In the White House’s telling of the story, Obama and Boehner did indeed settle on a rough framework for a deal, but it was all part of a fluid negotiation, and additional revenue was just one of the options on the table — not a last-minute demand. And while the president stood resolute against pressure from his own party, Boehner crumpled when challenged by the more radical members in his caucus. According to this version, Boehner made up the story about a late-breaking demand as a way of extricating himself from the negotiations, because he realized he couldn’t bring recalcitrant Republicans along. Boehner couldn’t deliver, is what Democrats have repeatedly said.

In recent weeks, as it became clear that I was planning to write a more nuanced and detailed account of the final week of negotiations, both sides — but primarily the speaker and his aides — went out of their way to give extensive accounts to reporters at other outlets, in an effort to reinforce their well-rehearsed narratives. And yet it’s possible now to get beyond these clashing realities. Over the last several months, I spoke with dozens of people who were involved in or were kept apprised of events that week, some of whom made available private documents from that time, including the various offers and counteroffers. I conducted most of these interviews on the condition that I would neither reveal nor quote the people who spoke to me, so that they would feel free to speak candidly.

What emerged from these conversations is a clearer and often surprising picture of exactly how close Obama and Boehner came to finalizing a historic agreement, what exactly was in it and why it ultimately fell apart — including a revelation that illuminates Boehner’s thinking in those final hours and directly contradicts a core element of the version he has told, even to some in his own leadership.

The truth here matters for more than its historical value. At the end of this year, no matter how the presidential election turns out, the two parties will face yet another Armageddon moment in the fight over debt and spending; this time, if they don’t settle on a plan to rein in the nation’s nearly $16 trillion debt, then a series of onerous budget cuts — worth about $1.2 trillion over 10 years, divided between defense and other programs — will automatically go into effect. If we understand what really went on last July, then we’ll have a better sense of how difficult it will be for the two parties to stave off the coming political calamity and why, too, the situation may not be quite as hopeless as it seems.

The Secret Negotiations Begin

You may recall that Washington last summer was verging on something resembling cold-war hysteria. Republicans in the House were refusing to meet an August deadline for increasing the nation’s debt limit by some $2.4 trillion unless they got an equivalent amount of budget cuts in return, raising the prospect of a default that, it was assumed, would send the financial markets into a death spiral. Vice President Joe Biden and Eric Cantor, the House majority leader and Boehner’s No. 2 in the Republican caucus, had been holding talks in hopes of finding some preliminary agreement that might avert disaster, but those talks broke down in late June, primarily over the issue of taxes; the two men and their staffs had identified something like $2 trillion in cuts over the next decade, but the White House wasn’t going to make a deal that didn’t include some new tax revenue, and Cantor was adamant that raising taxes — any taxes — was a deal-breaker.

By then, however, Obama and Boehner had themselves started meeting furtively in the White House, in secret negotiating sessions that grew out of a much-discussed golf outing in June. Over a few drinks at the clubhouse at Andrews Air Force Base, Boehner suggested they might be able to use the impending debt crisis to achieve something ambitious and significant — not just the kind of cuts that Cantor and Biden were discussing, but fundamental reforms to entitlement programs and the tax code too, a sweeping modernization of the federal budget. The president agreed that they should try to get something started, but the breakthrough that seemed to make a transformational deal possible didn’t come until mid-July, in the form of a cryptic e-mail.

Budget deals happen in much the same way you might haggle over the purchase of a house: one side bangs out a proposed contract and sends it to aides on the other side, who cross out some numbers and phrases and insert new ones in their place, until the two sides ultimately iron out their differences, or until someone delivers a final offer and walks away. In this case, Obama’s principal negotiators — Jack Lew, then his budget director, and Rob Nabors, his top aide on legislation — sent a proposal to Boehner’s team that included $1.5 trillion in new revenue over 10 years. The White House negotiators knew this had about as much chance of happening as a meteorite falling on the Capitol, but the real question was whether Boehner was willing to go some distance toward meeting them on the revenue side of the ledger, or whether he would stick to Cantor’s hard line against any form of new taxes.

When the response came back to Nabors, Boehner’s aides had, as expected, struck the $1.5 trillion from the offer. But in its place they had inserted a strange formulation: they were proposing to reduce federal revenue, “compared to current law,” by $2.8 trillion. On the surface, this sounded like a flagrant rejection of what the White House was proposing — “You’re asking for more in taxes, we’re giving you less” — but in fact Boehner was speaking in complex code.

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Sunday, July 17, Oval Office. Speaker John Boehner, House Majority Leader Eric Cantor, White House Chief of Staff Bill Daley and Treasury Secretary Tim Geithner meet with President Obama, where the framework for a deal is agreed upon.Credit
Illustration by Alexander Wells

Boehner’s Cryptic Message

There are two “base lines” — or sets of assumptions — that policy makers generally use when they try to make projections about future revenue, and in order to understand some of the most critical moments in the negotiations, it’s necessary to understand the arcane difference between them. One is “current law,” which refers to what’s supposed to happen in the years ahead, assuming that certain temporary tax cuts or increases really do expire as planned. The other is “current policy,” which refers to what the numbers would look like if you took the rules as they are today and froze them in place. The most important difference between these two projections has to do with the Bush tax cuts, which Obama and Congressional Republicans agreed to extend, temporarily, at the end of 2010. Under “current law,” those tax cuts would expire at the end of this year, leading to a projected total revenue of more than $39 trillion over the next decade. But few people in Washington actually expected Congress to let most — if any — of the Bush tax cuts lapse anytime soon, and through the more realistic lens of “current policy,” under which all the tax cuts would remain in place, that same 10-year number became something like $35.5 trillion, or $3.5 trillion less.

In his offer, Boehner had used the higher, less relevant “current law” base line. Then he’d proposed lowering revenue by $2.8 trillion, which reduced the 10-year number to just under $36.3 trillion. What mattered from the White House perspective was that this number was about $800 billion more in revenue than either party was actually expecting to generate under “current policy.”

This was an exceedingly convoluted way of coming at the tax question, and even Nabors, who is one of a small number of genuine budget experts in Washington, wasn’t sure, as he stared at Boehner’s language, whether it meant what he thought it meant. Sitting in his spacious West Wing office, Nabors might as well have been one of John F. Kennedy’s advisers in 1962, reading and rereading the cable from Khrushchev, trying to divine the carefully worded message within. He showed it to Lew, and they quickly reached the same conclusion: Boehner was saying that he was willing to accept $800 billion more in tax revenue. Or, to put it another way, Boehner was proposing to increase the government’s haul by the same amount you would get if you reversed Bush’s tax cuts for the most affluent Americans, but he was proposing to do it by lowering rates and eliminating loopholes and subsidies instead — a revenue increase by other means. There was no other way to read this except to conclude that the speaker was now backing off his party’s hard line against additional revenue.

Excited White House aides suddenly felt that a deal might really be possible. But even with more revenue now on the table, Boehner and Obama continued to go back and forth over the Rubik’s Cube-like structure of a comprehensive deal — whether entitlement cuts would have to come before tax reform, whether most of the cuts would accrue in the first decade or the second and so on. Meanwhile, political pressure was building from inside Boehner’s leadership circle. Cantor, who had heard about the Obama-Boehner talks only when Biden happened to mention it, was nonplused at having been excluded and appalled that Boehner was offering more revenue. He and others pressed the speaker to drop the idea of a comprehensive deal, and on July 9, Boehner did just that, calling Obama at Camp David to tell him that the grand bargain was dead. He issued a statement immediately after, saying it was time for both parties to set their sights on a less ambitious solution to the debt-ceiling crisis, which now loomed less than a month away.

Except the speaker couldn’t bring himself to settle for something less ambitious. Five days later, on July 14, he called the president yet again.

Decoding Boehner’s Proposal

Why couldn’t Boehner let it lie? It’s a question that still puzzles a lot of his closest allies in Washington, not to mention his fellow Republican leaders on the Hill. Obama’s reasons for chasing the grand bargain were clear enough. Not only was he bent on avoiding a catastrophic debt default, but he needed to get out from under the debt issue, to demonstrate that he cared about reducing deficits before public concerns about government spending, stoked by rhetoric on the right, overwhelmed his presidency. Boehner’s motives were less obvious. The speaker occupied what may have been the toughest spot in Washington — trying to control a nihilistic rebellion in his own caucus while watching the approval ratings for Congress fall into the teens, all the while surrounded by young, ambitious leaders who doubted his ideological resolve. The last thing Boehner needed, you would think, was to close his eyes and take a Thelma-and-Louise-style plunge with a president whom no one in his party could stand.

Nothing better illustrated Boehner’s position than his clandestine, convoluted overture to the president on taxes. The offer for $800 billion in additional revenue — as opposed to, say, $700 billion or $900 billion — was no accident. On one hand, Boehner’s people must have known that Obama probably couldn’t settle for anything less than that, because Democrats in Congress would demand that any deal recoup the cost of Bush’s least defensible tax cuts. At the same time, Boehner’s aides had calculated that, at $800 billion, they could plausibly argue to their own caucus that the government could raise more money without actually raising anyone’s taxes.

How could you make that case? Boehner would argue that some sizable chunk of that money — if not all of it — would come to the government as a result of economic growth spurred by new, lower tax rates, and from better compliance, since the new tax code would be less confusing. Thus, by this feat of actuarial magic, Boehner contended that raising revenue did not require raising taxes, and in fact would enable you to lower them. The math was debatable, certainly, but it was a central tenet of any deal Boehner would negotiate.

But then, having worked out a theoretical way to get to the $800 billion that he knew the White House needed, Boehner wasn’t comfortable even putting the figure down on a piece of paper. The idea of any new tax revenue was so heretical to his party, and Boehner was so fearful of the reaction, that his aides felt compelled to come up with a roundabout way of expressing the offer in terms that few people in Washington would be able to decipher, just in case the paper should fall into the wrong — that is, his own party’s — hands. Boehner knew that his position might well imperil his standing as speaker, whether it led to a deal or not, and yet he was taking it anyway.

Boehner would later tell me that he was determined to do this because he was tired, after 20 years in Washington, of seeing one Congress and one president after another ignore the coming explosion of spending on entitlement programs and the growing public debt. He also shared Obama’s view that a grand bargain would actually be easier to pass than a smaller deal — that if lawmakers were going to have to make a bunch of politically explosive cuts, they were more likely to go through with it if they could go tell voters that they’d achieved something truly transformative. As Biden put it, “There’s no point in dying on a small cross.”

The Trouble Getting to ‘Yes’

But politics is often as much about self-perception as it is about policy, and it wasn’t hard to discern a more personal reason for Boehner’s attachment to the idea of a grand bargain. Having fashioned himself as a reformer since coming to Congress in 1991, Boehner was now 61, and with Congress flipping back and forth between the parties, it wasn’t a given that he would hold the speakership for more than a few years. What would Boehner’s legacy be, or would he even have one? Some speakers, like Tip O’Neill or Newt Gingrich, carve out places in history as indispensable partners in creating momentous legislation. Others, like Denny Hastert, are destined to be lost to the ages. Those who know Boehner say that what he saw in the grand bargain was a chance to be remembered as a statesman who helped set the country on a different course, rather than as a party functionary who shakily presided over a fractious caucus.

Obama and Boehner had spent little time together before the talks began, and they had only a vague sense of each other. Aides on both sides described a kind of forced familiarity between the two men, who would begin meetings with the shallowest of chatter — “Play any golf this weekend, John?” — before moving quickly into the substance of budget politics. White House aides thought Boehner looked as if there were someplace he’d rather be, while Boehner’s aides were put off by what they saw as Obama’s lecturing style. Still, the two men — Midwesterners, former state legislators, introverts by nature and smokers by habit — seemed to think they could trust each other.

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Tuesday, July 19, Capitol building. Senator Mark Warner, left, and the rest of the Gang of Six brief fellow senators on their plan.Credit
Illustration by Alexander Wells

In fact, when Boehner called back on that Thursday afternoon, the 14th, in hopes of restarting the negotiations, it wasn’t Obama but rather one of his chief aides who Boehner had decided was the problem. For weeks leading up to the breakdown in talks, Boehner and his top lieutenants — Barry Jackson, his chief of staff, and Brett Loper, his policy aide — had been talking principally to Jack Lew and Rob Nabors at the White House. But they had become exasperated with Lew, who, in their view, talked a lot but offered few concessions. Lew, whose detailed knowledge of the budget outpaced anyone else’s in the room, always seemed to have a better idea than whatever Boehner was proposing, and these ideas seemed to Boehner like more complicated ways of describing positions they had already rejected. The problem with Lew, Boehner bluntly told the president when he called, is that he just didn’t know how to get to “yes.”

Boehner thought he had a better shot with Bill Daley, the president’s chief of staff, and Timothy Geithner, the Treasury secretary. Daley had made a point of reaching out to Boehner since joining the administration, and he was known to be a pragmatist and a dealmaker. Geithner, clearly rattled by the possibility that Treasury might default on its debt, had been issuing almost daily warnings to Congressional leaders about the mounting fear in the markets. Send me Daley and Geithner, Boehner told the president, and let’s see what we can do.

The next afternoon, a Friday, Daley and Geithner went to the Capitol to meet with Boehner and Cantor. In addition to requesting a change in negotiators, Boehner’s team had come up with a new, simpler way to structure the deal that they hoped would eliminate some of the persistent conflicts over timing in the earlier talks. Before, Boehner had wanted to legislate cuts in annual spending and entitlements up front, while leaving tax reform for Congressional committees to work out over a period of months — a formulation that worried Obama and his allies. But now the speaker’s team suggested that the two sides come up with a framework of broad principles and specific target numbers on both the cuts and revenue, and then let Congress work out all the details at the same time. Using that template, the two sides quickly found a large swath of common ground. Two days later, on Sunday afternoon, Boehner and Cantor went to the White House to continue the conversation, and Obama joined the group after he returned from church.

No one was under the illusion that a final agreement had been nailed down and was ready for signatures, but when Obama and Boehner shook hands that afternoon, there was a general feeling that they would work through the remaining details relatively easily. Before the meeting at last broke up, Obama mentioned to the others that they would have to carefully think about how to roll out the deal, to make sure that both sides were saying the same thing publicly. That night, Jackson and Loper sent over a three-page proposal based on the discussions; in exchange for agreeing to the $800 billion in additional revenue, they asked for more than $450 billion in combined cuts to Medicare and Medicaid over the next decade alone, as well as a series of changes to Social Security, including a new formula for calculating benefits and a higher retirement age.

There was no question that the framework negotiated by Obama, Daley and Geithner — and laid out in the Republicans’ offer sheet — unsettled the stomachs of some White House aides. No one liked the idea of acceding to Medicare cuts, and most didn’t think Social Security should be part of the deal at all. (Democratic orthodoxy holds that Social Security has nothing to do with the federal debt, since it generates its own revenue from the payroll tax.) But Obama’s senior aides, including the political adviser David Plouffe, had come to believe that a grand bargain, however imperfect, was preferable to a smaller deal — and far preferable to a debt default. The debate now was about what it would take to get the votes. Nabors and his legislative team had real doubts that Democrats in Congress would go for anything close to what Boehner was asking for, and they were just as skeptical that Boehner could get his own caucus behind it. As Jackson and Loper waited anxiously at the Capitol for a counteroffer, the internal White House discussions dragged on into Monday night.

For more than six months, ever since Alan Simpson and Erskine Bowles, the chairmen of Obama’s fiscal commission, offered their stark recommendations for remaking the budget at the end of 2010, a group of senators — Mark Warner, Richard Durbin and Kent Conrad on the Democratic side, along with the Republicans Saxby Chambliss, Tom Coburn and Mike Crapo — had been trying to build some consensus around a plan. Over dozens of dinners and negotiating sessions, some of which were held at Warner’s stately home in Alexandria, Va., the so-called Gang of Six labored over a compromise they could sell to their colleagues, while leaders of both parties eyed them warily.

But a deal remained maddeningly out of reach, mainly because it was proving impossible to bridge the distance between the two members of the gang who were furthest apart on the ideological spectrum. Durbin, a member of the Democratic leadership and a close friend of the president’s — and the only avowed liberal in the group — was determined to protect tax credits for the poor and the working class. Coburn, a rigid fiscal conservative from Oklahoma, wanted $130 billion more in cuts to entitlements than the rest of the group. In May, Coburn excused himself from the deliberations in order to come up with his own deficit-slashing plan.

By mid-July, just as Boehner was preparing to invite Daley and Geithner up to the Hill, the group’s informal chairmen, Warner and Chambliss, decided they couldn’t wait any longer to share the gang’s uncompleted work with the rest of the Senate. They scheduled a briefing for senators only — no staff — on Tuesday morning in the Capitol.

The White House knew about the briefing (Durbin had kept the West Wing informed), but it didn’t seem especially consequential to aides who were now thoroughly immersed in their own secret negotiations. After all, the gang had made noise about being close to a deal many times before, and nothing had ever come of it. Even now, its members admitted to having only the broadest outline of a plan, and the briefing was slated for 8:30, when most senators are still groping for coffee or pounding the treadmill. Even Warner thought it was bound to be more of a sideshow than a main event.

And so no one was more surprised than the gang members themselves when almost half the Senate, roughly divided between the parties, trickled in as Warner and Chambliss outlined the new revenue and spending cuts in their emerging plan to cut $4.6 trillion from the budget. The first one to rise, after the presentation was finished, was Coburn. The unpredictable sixth man gave an impassioned endorsement of the plan, telling his colleagues it wasn’t perfect, but it was the best they were going to accomplish. Then Durbin stood up and echoed the sentiment. One by one, senators from both parties added their support.

It’s not hard now to understand what happened in the room. As House Republicans and the administration debated the debt, most of the Senate felt sidelined and powerless. What the Gang of Six was offering was the promise of action, a way for the Senate to re-emerge as a serious player in a national drama.

A Costly Miscalculation

Word quickly traveled down Pennsylvania Avenue to the White House, where Nabors, who was still honing a response to Boehner’s offer from Sunday night, called Barry Jackson in the speaker’s office and asked what was going on. Jackson wasn’t sure. Within a few hours, though, the White House had the sense that something important had shifted. More than 20 Republican senators, by some counts, had stood up in favor of a plan that would raise more revenue, and Obama thought he now had an opportunity to exert more pressure on House Republicans by highlighting the widening split inside their own party. Shortly after noon, Obama took the unusual step of marching out to the briefing room to declare his support for the Gang of Six, instantly elevating what was supposed to have been an informal, sparsely attended briefing into the day’s national news. It was, in retrospect, a costly miscalculation.

Even before the president had stopped speaking, it was beginning to dawn on White House aides that what had looked like an opportunity was actually a serious problem. Like Boehner, Obama was risking an insurrection in his own party once the details of their plan became public. For a lot of Democratic lawmakers, even conceding the central Republican point about the debt — that it was the hallmark of unsustainable government spending — was a kind of apostasy. The way they saw it, Republicans had created the deficit problem with ill-advised tax cuts and disastrous wars, and now they were using it as a pretense to roll back social programs for the poor and middle class. And as for Medicare, leading Democrats on the Hill hoped to make it a pivotal issue in House and Senate races in 2012, now that Paul Ryan, the Republican chairman of the House budget committee, had proposed replacing the program with a voucher system. (A sign in the window at the Democratic headquarters in Washington read: “Vote Republican, End Medicare.”) Why, they wondered, would the president want to forfeit that advantage by agreeing now to cut those programs himself?

If it was never going to be easy for the White House to sell the grand bargain to Democrats on the Hill, then the plan put forward by the Gang of Six was likely to make it impossible. On the surface, the gang had proposed an overall revenue increase of $1.2 trillion, 50 percent more than the $800 billion Obama and Boehner were talking about. Democrats were bound to ask why the president had settled for less in taxes than the Gang of Six did.

But once Obama’s aides looked more closely at the numbers, they understood that the political problem posed by the gang’s plan was actually far worse. This is where the whole distinction between base lines — “current law” and “current policy” — comes in again. The gang had settled on a base line that was somewhere between “current law” and “current policy”; it had assumed the Bush tax cuts for the most affluent were expiring, while the other tax cuts would persist. The White House, meanwhile, had been calculating their figures based on “current policy,” under which all the tax cuts would remain in place. This meant that when you actually compared the two plans in an apples-to-apples way, the Gang of Six was proposing to raise revenue by about $2 trillion — $1.2 trillion more than the president and the speaker had tentatively agreed to.

How could Obama possibly ask Democratic leaders to pass a deal with $800 billion in new revenue, when a bunch of Republican senators — not to mention the president himself, on national TV — had just stood up to applaud a plan with $2 trillion attached? Never mind that the Gang of Six plan was little more than a memo, with no chance of becoming an actual bill — let alone passing the House or Senate. Liberals would laugh the president out of the room. The numbers would confirm the suspicion, already voiced by some lawmakers privately, that Obama wanted a bipartisan victory too badly and would accept a deal on any terms, even if it sold out his party’s principles.

Early Tuesday afternoon, Nabors called Jackson, this time sounding grim. They were going to have a problem on the balance between revenue and spending, he said. Daley delivered a similar message to Jackson. What do we do now? he wanted to know. The president just wouldn’t be able to sell that deal to enough of his own senators and congressmen to get it across the finish line.

As White House aides would later present it, Boehner’s guys took this news with equanimity, indicating they were skeptical but willing to talk. The speaker’s aides, however, say they were reeling. A deal is a deal, a mystified Jackson told Daley. He and Loper hoped the alarm in the White House might be a temporary overreaction and that Obama might relent once he and Boehner had a chance to talk. They were still trying to process what had happened when, later that night, an e-mail from Rob Nabors popped into Jackson’s in-box. The president’s counteroffer had finally arrived.

The Grand Bargain Within Reach

For all the talk since last July about who blew up the deal, it has been difficult to get a clear sense of what specifically the agreement was supposed to include. And so the three-page counteroffer that Rob Nabors sent to Barry Jackson and Brett Loper that Tuesday night, which turned out to be the last set of numbers exchanged between the two sides, represents the most detailed picture yet of what a grand bargain might have looked like. It’s a remarkable snapshot of the moment, not for the points of contention it exposes, but rather because it illustrates how much agreement Obama and Boehner had actually managed to find.

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They had agreed to reduce discretionary spending — meaning both the defense budget and money used to finance the rest of the government — by about $1.2 trillion over 10 years; it would be up to Congress to figure out how. They also agreed to a list of programs from which they could cut at least $200 billion more in the coming decade. These included an estimated $44 billion from pensions for civilian and military employees of the government; $30 billion from Fannie Mae and Freddie Mac; $33 billion from farm subsidies and conservation programs; and $16 billion from reforming the Postal Service.

On entitlements too they had moved closer to a final deal. The White House agreed to cut at least $250 billion from Medicare in the next 10 years and another $800 billion in the decade after that, in part by raising the eligibility age. The administration had endorsed another $110 billion or so in cuts to Medicaid and other health care programs, with $250 billion more in the second decade. And in a move certain to provoke rebellion in the Democratic ranks, Obama was willing to apply a new, less generous formula for calculating Social Security benefits, which would start in 2015. (The White House had rejected Boehner’s bid to raise the retirement age.) This wasn’t quite enough for Boehner, nor was it as extensive as what the Gang of Six had proposed. But the speaker’s team didn’t consider the differences to be insurmountable, assuming the two sides could also settle on a revenue number.

The section on revenue, though, was one of two significant disagreements that were less easily brushed aside. Boehner’s offer two days earlier, on Sunday, included several points to which he believed Daley and Geithner had essentially agreed. But in his counteroffer, written hours after the Gang of Six briefing, Obama had made some extensive changes to this section. To the $800 billion figure, he said he now wanted to add an amount equal to the cuts in Medicare and Medicaid — an additional $360 billion, at least — for a total of $1.16 trillion in total revenue. Aside from increasing the sheer amount, what Obama was doing, for the first time in the negotiation, was explicitly linking the amount of new revenue to the cuts Boehner wanted in entitlement programs. In other words, Obama’s new formula meant that for every additional dollar in savings Boehner wanted to negotiate from Medicare or Medicaid, he was going to have to add a dollar of revenue.

This in itself was certainly enough to throw the deal into jeopardy. But the White House made still other changes that were problematic. Most notably, Boehner’s team had insisted that when lawmakers sat down to design a new tax code, the $800 billion in additional revenue had to be a “ceiling” rather than a “floor” — in other words, the final number generated through tax reform couldn’t be more than $800 billion, but it could be less. That’s because, as part of revising the code, Boehner intended to ask Congress for something called a “macro estimate” of the grand bargain’s impact — basically, a best guess as to the future revenues that would accrue once the lower rates kicked in and the economy started humming along. Democrats normally despise such projections, because they are used to support the conservative theory of supply-side economics. But the macro estimate was essential to Boehner; he needed it to make the argument that a decent chunk of the additional revenue could come through growth and stepped-up compliance, and thus Congress wouldn’t need to actually raise anybody’s rates to get it done. Boehner left that Sunday meeting convinced that Geithner, in particular, understood and accepted this condition.

But in his counteroffer, Obama had reversed the formulation so that the tax revenue figure — now at $1.16 trillion — would be the minimum that rewriting the code could achieve (a floor), rather than a maximum (a ceiling). With a slight turn of phrase, he rejected Boehner’s entire premise that growth could be counted on to deliver some of the revenue. Boehner could seek all the macro estimates he wanted if it made him feel better, but he wouldn’t be able to use those estimates to lower the amount of new tax revenue that Congress would need to collect.

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Thursday, July 21, John Boehner’s office. Relations have grown tense between Boehner and the White House. Trying to salvage a deal, Boehner floats the idea of a counteroffer to Cantor.Credit
Illustration by Alexander Wells

White House aides would later insist that, despite their rough agreement on a framework the previous Sunday, the discussion about tax reform had always been fluid and unsettled, an ongoing negotiation in which both sides were still feeling out each other’s limits. The Gang of Six briefing had no doubt complicated this negotiation, they agreed, but it wasn’t as if they had signed on to something and then taken it back. If this is true, though, then it’s true only in the technical sense. If you shake hands with a guy on the price of a car, and you agree to talk again after the car has been inspected and the loan has been approved, you don’t really expect to show up and find out that car now costs $5,000 more. This is essentially what happened to Boehner. What both Tuesday’s panicky calls from the White House and the subsequent counteroffer make clear is that Obama knew he was changing the terms and felt he had no choice.

The other remaining area of contention had to do with the problem of enforcement provisions, or “triggers,” in the deal. Because tax reform would take some time for Congress to puzzle out, while the spending cuts were relatively straightforward, the White House had been concerned from the start about being double-crossed. How could Democrats be assured that the Republican-controlled House wouldn’t simply announce a deal, enact only the spending cuts they wanted and then sabotage the revenue piece? The answer, Obama’s team decided, were a couple of “triggers” — something both sides really hated — that would automatically kick in if they didn’t come up with a version of tax reform that each party could stomach.

Specifically, Obama had two triggers in mind. The first, for Democrats, would have rescinded the Bush tax cuts for the highest earners. Boehner rejected this idea. He pointed out that Democrats themselves would have little incentive to pass tax reform if, by not passing it, they could achieve one of their most cherished policy objectives — the elimination of the Bush tax cuts.

The second trigger, to appease Republicans, would include an automatic $425 billion in cuts to Medicare and Medicaid over 10 years. But Boehner repeatedly said that he wanted his own “political trophy” as a trigger, something that had the same resonance for the right as the Bush tax cuts had for the left — namely the elimination of the “individual mandate,” the central plank in Obama’s health-care law that required every American to be insured. Striking down the provision was a top priority for the Tea Partiers in Congress, who saw it as evidence of Obama’s tyrannical tendencies. Obama wouldn’t entertain the possibility. The argument had been going on since the first round of negotiations between the two men and their staffs, but now that a deal seemed imminent, the question of how to enforce it had taken on a new urgency. At its core, the trigger debate was a matter of trust; each man had to be assured that the other wasn’t going to let his party renege on the tax-reform agreement when the inevitable arguments arose. And because they hadn’t worked together much and barely knew each other on a personal level, the only way for Obama and Boehner to feel reassured was if the political cost of pulling out was intolerably high to both of them.

Obama and Boehner argued heatedly but respectfully over both sticking points — the revenue number and the triggers — during a two-hour meeting in the Oval Office on Wednesday, July 20. By the next morning, both men were facing rebellions on the Hill. The Times’s Carl Hulse and Jackie Calmes had written a front-page article disclosing the existence of the new round of talks and asserting that a deal was very near. Arriving for the weekly lunch of the Democratic Senate caucus, Jack Lew found himself berated by senators who were angered by the talk of entitlement cuts in exchange for the relatively paltry $800 billion in tax money, and livid at having heard about it from The Times. Senator Harry Reid, the majority leader, had been fully briefed (along with the House leader, Nancy Pelosi) only the night before. He remained stonily and pointedly silent in the meeting, while Lew absorbed one verbal blow after another.

At that very moment, Boehner was dialing Rush Limbaugh’s radio show, unbidden, in an effort to quell the eruption on the right. It wasn’t only the additional revenue that conservatives hated. Having campaigned in 2010 against Obama’s health-care plan, which included future Medicare cuts, conservatives in Congress were no more eager than Democrats to give the issue away in advance of 2012. (Their resistance to this part of the grand bargain highlighted what is perhaps the central paradox of budget politics on the right: Republicans have defined themselves almost entirely by their determination to reduce debt, but virtually every means of actually getting there — taxes, defense cuts, restructuring entitlements — strikes them as politically unpalatable.) “There is absolutely no deal,” Boehner assured Limbaugh on air.

And yet, even then, as powerful contingents in both parties rose up to oppose a deal that was already tenuous, negotiations were proceeding amiably and apace. At the White House that Thursday morning, July 21, Jackson, Loper, Nabors, Sperling and Lew, among other aides, agreed to set aside the revenue question and focus on hammering out some of the smaller discrepancies in the two offers. By now, a level of trust had grown among them; the mere fact that they had exchanged so much paper, and that none of it had been leaked to reporters or bloggers, seemed to cement their working relationship. To hear aides on both sides tell it, anyone who wandered into Nabors’s West Wing office would have thought they were moving, inexorably and constructively, toward a final agreement.

In fact, Obama felt confident enough to tell Reid and Pelosi, during a meeting in the Oval Office that Thursday evening, that a grand bargain was imminent. The president told his Congressional leaders that he had given Boehner a choice: either the two sides could go for the bigger bargain that Obama wanted, with the nearly $1.2 trillion in revenue and the spending cuts they were already close to nailing down, or they could do a smaller version, with the original $800 billion in revenue but a smaller slate of cuts. Obama told Reid and Pelosi that he understood that this would seem like a choice between a bad deal and a worse deal, but he wanted a commitment from them that they would get behind the agreement. Neither of the Congressional leaders was wild about the prospect, but they quietly pledged they’d have the president’s back.

Cantor and the Counteroffer

Like much of Washington, White House aides were perplexed by the relationship between Boehner and the man who was 14 years younger and next in line for his job, Eric Cantor. During one of a series of tense White House meetings with Congressional leaders in July, Obama’s aides had been stunned — even a little embarrassed — to see Cantor, when asked for his opinion, directly contradict the speaker in front of the president. He insisted that the caucus would not accept the kind of sweeping deal that both leaders wanted. It struck Obama’s aides as breach of Washington decorum, and it appeared to betray deeper divisions inside the Republican caucus. When Daley and Geithner were first invited by Boehner to his Capitol office to restart the negotiations in mid-July, they were surprised to find Cantor there too. It was one of the main reasons that the White House dared to hope a deal might work. They assumed that Cantor’s presence meant that the two Republican leaders were now speaking with the same voice.

Cantor hadn’t changed his mind about the grand bargain, however. Boehner had invited him to the meeting, just as he had invited Daley and Geithner, and there was little the majority leader could do in that situation other than accept. And from Cantor’s perspective, it was better to be inside the room than not, which is what had happened during the first round of talks, when for 10 days he had been ignorant of the negotiations going on.

Cantor’s objections weren’t simply obstructionist. He didn’t like the revenue piece — partly on principle, and partly because he thought it would reignite the grass-roots insurgency that Washington Republicans had been desperately trying to keep under control, endangering the re-election of some members. A fight over taxes — with the party’s leaders arguing that government should get more money, rather than less — might lead to outright insurrection and a breakaway third party. Cantor also didn’t trust the White House to stand by a deal, warning that they would ultimately come back with more demands. Perhaps most important, Cantor was highly skeptical that a grand bargain — with Boehner’s $800 billion gambit already being called a tax increase by The Wall Street Journal’s editorial page — had any chance of passing the House.

This last point hinted at what was perceived inside the caucus as Boehner’s primary vulnerability. Boehner had traveled an idiosyncratic path to the speakership, having never served as a House whip, the pivotal job of corralling and counting votes. He wasn’t much of a closer, either; the more aggressive tactics that “getting to yes” sometimes required didn’t come naturally to him. Boehner seemed to believe that his prestige as speaker would carry the day on key votes, but already that assumption had gotten him into trouble a few times, and other members of his leadership team had little faith in his predictions. Before the Gang of Six fiasco, Boehner estimated that he could round up something like 150 votes (out of 240 Republican members) for the grand bargain. Cantor and many other senior Republicans thought the number could be less than half of that.

Photo

Friday, July 22, Oval Office. After 24 hours of silence from Boehner, President Obama receives the call telling him the deal is off.Credit
Illustration by Alexander Wells

By Thursday afternoon, when Cantor entered Boehner’s office to consult on their next move, the speaker was in something of a box. The White House position was leaving Boehner little room to maneuver within his own caucus, and yet he was loath to see the deal unravel after getting so close, and with so little time left before the debt-limit standoff became a full-blown national crisis.

The speaker’s story about this moment in the negotiations has always been remarkably consistent, and he and his aides have repeated it frequently in recent weeks, including to me. The additional revenue that Obama demanded was a “nonstarter,” he says. He did a “gut check” and decided that he could no longer trust the president, who obviously didn’t have the courage to stand behind the deal they had made. And so Boehner had no choice but to walk away from the negotiations. He and Cantor, of like mind, reached this conclusion together.

It’s a clean story of a man standing by his conservative principles. And yet the additional revenue wasn’t, strictly speaking, a nonstarter. After all, Boehner wanted a deal badly enough to stay at the table for 48 hours after Obama “moved the goal posts,” which casts doubt on his claim that this breach of trust was an obvious dealbreaker. And at some point that Thursday, Boehner and his most senior aides at least entertained what would have been an astounding counteroffer to the president.

As part of a broader proposal, which has remained until now a closely held secret, Boehner was apparently open to meeting the president at the new, higher revenue target — a concession that most likely would have meant abandoning the idea that no taxes would have to be raised. Had that counteroffer ever made it to Obama’s desk, it’s not hard to imagine that the grand bargain would have gotten done within 24 hours, at great political risk to both men. Whether it could have passed the House — whether, in fact, any deal would ever have reached the president’s desk — is a question that will never be answered.

What happened, instead, based on extensive reporting, was this: Boehner raised the possibility of his counteroffer with Cantor on that Thursday afternoon, and Cantor dismissed the suggestion out of hand. He had always warned that the White House couldn’t be trusted and would come back for more, and Obama’s reversal on the revenue number had vindicated that view. Cantor made it clear he wasn’t going to support any more counteroffers. He was pretty sure the caucus wouldn’t either. No longer was Cantor content to be the skeptic in the room. He was now certain that the grand bargain was a practical impossibility.

Boehner talked to Obama a short while later. The president laid out the options as he would later relay them to Reid and Pelosi: more revenue and a bigger package, or the $800 billion and a smaller one. Boehner heard him out, but by then he must have known, from his discussions with Cantor and others, that neither option was going anywhere in his own caucus. It was one thing to risk your speakership on a grand bargain, which Boehner had without question been willing and even eager to do. It was another thing to throw that speakership away with little chance of success, which is what Obama was now asking of him.

The final act of the saga played out like the awkward undoing of a brief teenage romance, minus the texting and Facebook un-friending. At about 10 p.m. that Thursday, Obama placed a call to Boehner’s cellphone to check in; when Boehner didn’t pick up, the president left a voice-mail message. Late the next morning, Obama casually asked Daley if he’d heard from Boehner; Daley told him there was no word, and he added that he couldn’t reach any of the speaker’s aides either. And so the president waited anxiously, wondering why the speaker wasn’t returning his call. As the hours passed, the mood in the West Wing turned from puzzlement to concern to anger. By the middle of the afternoon, rumors began to reach the White House from the Hill. Boehner had scheduled a briefing for reporters. He was telling people the deal was dead, and he was meeting with Reid and Mitch McConnell, the Republican leader in the Senate, to see if there was some other way to raise the debt limit.

When Boehner finally called back late that Friday afternoon, it was a perfunctory call between wounded suitors. Each man hung up and immediately went out to tell his side of the story, offering the versions — Obama moved the goal posts, Boehner couldn’t deliver — that would soon become fixtures of Washington’s double-sided reality. Both were essentially true, and yet incomplete.

Why didn’t Boehner call back earlier on Friday? Any kid who has ever traded a Pokémon card knows that you don’t walk away from a negotiation without at least leaving your best offer on the table. Boehner would say that he had run out of time and was certain Obama wouldn’t budge. But there’s a more persuasive theory, which is that Boehner didn’t want to talk with Obama because he feared exactly the opposite — that Obama would respond by offering him the original terms from the previous Sunday, and that Boehner would then find himself trapped. He had to now know that, despite his sense of himself as a persuasive statesman who could get his caucus to follow his lead, he couldn’t get any deal past even his own leadership. It was safer for Boehner to walk away and accuse Obama of having sabotaged the deal than to risk that Obama would retreat to the earlier terms on which they had agreed, forcing the speaker to backtrack himself.

In the end, that’s essentially what happened, anyway. The following day, Congressional leaders informed Obama that they were ready to offer a deal on their own. It would force another vote on the debt ceiling in 2012, and it would create a “supercommittee” of six lawmakers charged with finding massive spending reductions; if the committee failed, a slate of painful cuts would go into effect at the end of 2012. (Ultimately, the debt ceiling vote was pushed back to 2013, but the rest of the bill passed.) Obama hated it and made his anger known to the lawmakers who laid it out for him in the Oval Office. After that meeting, he called Boehner yet again, asking if they could just go back to the previous Sunday’s handshake agreement. Boehner told him it was time to move on.

From Boehner’s perspective, it’s not hard to see why he came away feeling Obama betrayed him. “He had to have known that this was going to set my hair on fire,” Boehner told me when we sat together in his office on the first day of March. He was seated in a leather chair by a marble fireplace, his cigarette smoldering in an ashtray at his side. Three aides sat nearby.

“You have to understand,” he went on, “there were hours and hours of conversation, and he would tell me more about my political situation than I ever would think about it, all right? So when you come in and all of a sudden you want $400 billion more — he had to have known!” Boehner shook his head, as if he was still puzzled by it all.

Video

Playing the Debt Deal Blame Game

A more surprising picture emerges of what led to the falling apart of the so-called “grand bargain.”

“Well, he did know,” the speaker finally decided. “He had to have known that he was driving this thing off a cliff.”

And yet, in the end, while both leaders had profound reservations about a grand bargain that would threaten their parties’ priorities, what’s undeniable, despite all the furious efforts to peddle a different story, is that Obama managed to persuade his closest allies to sign off on what he wanted them to do, and Boehner didn’t, or couldn’t. While Democratic leaders were willing to swallow either a deal with more revenue or a deal with less, Boehner’s theoretical counteroffer, which probably reflected what he would have done if empowered to act alone, never even got a hearing from his leadership team.

Shortly before this article was published, Boehner issued a statement to me saying there was “zero chance” of them actually making a counteroffer late that week. But when I asked Boehner on the first day of March whether he had floated his counteroffer past Republican leaders other than Cantor, his reply was more ambiguous.

“I don’t know that it ever got that far,” Boehner said after a pause. “Eric and I were comfortable with where we were. Did we think we were out on a limb? Yes. Did we think the president, if we came to an agreement, was going to be out on a limb? Yes. But I don’t think us sitting in this room with the rest of the leaders, discussing exactly where we were . . . I’m not going to say it didn’t happen. But the reason I feel that way is because I had a pretty good feel for what I thought the reaction was.” Later, he told me flatly, “I look at what happened last summer as the biggest disappointment I’ve had as speaker.”

Now, with another debt battle looming, the chance of resurrecting some kind of grand bargain doesn’t seem very promising. Obama and Boehner have spoken only a handful of times. The administration’s most driven dealmaker, Bill Daley, never recovered from the episode, which poisoned his relationship with Harry Reid, who blamed Daley for having kept him and other Senate leaders in the dark as the negotiations unfolded. Daley resigned in January and was replaced by Jack Lew — the guy whom Boehner and his aides tried to sideline.

When I talked to Boehner about the two potential crises coming at year’s end (the possibility of automatic budget cuts and, weeks later, another vote on the debt ceiling), he told me he was placing his hopes on getting a new president. “I don’t see any real evidence that this president has the courage to lead,” he growled. He added that any comprehensive deal might be even harder to sell to his members this time around.

And yet the failed attempt at a grand bargain wasn’t necessarily an unmitigated disaster. The ugly, months-long process of trying to avoid a meltdown over the debt ceiling may have further embittered a lot of ordinary Americans, but it also forced policy makers on both sides to wrestle with their own capacity for compromise. For weeks, in both the White House and in the speaker’s office, the most influential aides in the country burrowed into spreadsheets and considered, in unusually specific terms, what kinds of budget cuts and revenue numbers they could live with.

They didn’t get the sprawling deal they were after, but they did produce a serious blueprint for bipartisan reform, a series of confidential memos that left them just a few hundred billion dollars apart. That may sound like real money, and it is, but when you consider that the government can get some $25 billion back just by selling its broadcast spectrum, you begin to understand how bridgeable that difference is. What’s clear now is that the only thing holding Washington back from a meaningful step toward reducing debt and modernizing government isn’t any single policy dilemma, but rather the political dynamic that makes compromise such a mortal risk.

That dynamic could change after November. And however counterintuitive this may seem, it may be more apt to change if the cast of characters remains the same. Assume for the moment that Mitt Romney is elected president and is forced to confront, even before staffing his administration or taking the oath of office, an imminent budget crisis. Romney would have been elected despite the deep ambivalence of his own party’s conservative base, whose support he would need in order to govern, and who would be watching his every blink for proof of ideological fealty. Does anyone really think he could risk infuriating that base, in his first move as president-elect, by hammering out a compromise that increases tax revenue and cuts Medicare?

Should Obama win re-election, on the other hand, he would face the impending crisis knowing that he had just run the final campaign of his life and that he had 18 months, at best, to solidify his legacy. Boehner might well find himself, two years removed from the Tea Party elections of 2010, with fewer extremists in his own caucus. And for all their residual bitterness and mistrust, they would both know that they still had a draft agreement that left them about 80 percent of the way there.

Near the end of our interview, I asked Boehner what he thought would happen when the two sides clashed again in several months. He took a drag on his cigarette.

“We’re heading toward a very big moment, where big decisions are going to have to be made about the future of our country,” he said blandly. Then he surprised me by rising quickly to his feet and clapping his hands. “All right!” he said, reaching for my hand. He was through talking, at least for now.

Correction: April 15, 2012

An article on April 1 about the debt-deal negotiations last summer misstated the effect on revenue if some tax cuts enacted under George W. Bush were allowed to persist. Those cuts, for taxpayers making $200,000 or less, would be more costly, not less, than the cuts for the most affluent taxpayers.